Investments  

Advisers beware alt asset business governance

David Newman

David Newman

The Financial Conduct Authority has put the alternative assets industry on warning with its ‘Dear CEO’ letter, putting the spotlight on whether these products are being offered to the right clients.

The very nature of alternative assets – relatively illiquid, and often higher risk of failure than in public markets – means they are usually only appropriate for experienced and high-net-worth investors.

But as the search for returns increases in a bid to keep pace with inflation, which reached double figures for the first time in 40 years in August, the appetite for these high-risk but potentially high-return products has grown.

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Private markets, for example, has been one of the top performing sectors for more than a decade.

Traditionally, alternative assets – including private markets – have been dealt with manually. The paperwork has been filled in by hand, where it has been filled in at all, and the audit process if there is a mis-selling query could easily be found wanting.

These people-led operational models may have been appropriate back in the day. But this was never a good way to deal with investors who were putting their money into risky products.

This approach left a lot of potential gaps in the compliance process and created regulatory black holes that firms would struggle to document from an audit perspective.

In fact, the amount of paperwork involved with the investment process meant that, in some cases, shortcuts were much more likely to have been taken.

Now, firms are increasingly using digital platforms to connect their clients with investment opportunities, making it easier to ensure the right deals are offered to the right investors, significantly reducing the possibility of mis-selling.

The democratisation of private markets has allowed greater numbers of investors to get involved in alternative asset investments. The obvious appeal of returns that have consistently outperformed public markets has meant investors have been keen to use alternatives to diversify their portfolios.

However, if proper regulatory controls have not been implemented by the firm promoting the investment opportunities, there are likely to be serious questions to answer about whether potential investors have been presented with deals that are aligned to their regulatory classification and whether they could potentially have been mis-sold.

Not all firms offering these products to clients are using tech to help them comply with their regulatory obligations, and any companies still using more antiquated methods need to watch out as the FCA’s scrutiny increases. 

With this comes the chance of action. It would be best for no company to be found wanting in this area, as it could have a major impact on investors and reduce confidence in any firm operating in the private markets or alternative assets space. 

Whether we will see mis-selling problems arise in this sector remains to be seen – and I really hope we do not.